Biologics are still the hot commodity in the drug industry. Observers call large-molecule drugs the therapies of the future, and these medicines’ complexity makes them difficult for would-be follow-on manufacturers to create. Big Pharma companies that have not yet acquired biopharmaceuticals firms are considering doing so to bolster their pipelines and profits. But not all biologics companies are living large, as data from Ernst & Young remind us.
Only 40 of the more than 270 publicly traded large-molecule companies are profitable, and the rest must rely on venture capital. Companies without products on the market are having a tougher time attracting funding these days. Up-front payments have decreased about 55% in the past five years, according to Ernst & Young. Money is increasingly contingent on achieving drug-development goals. This strategy might help investors get returns more easily, but it could discourage the kind of risk-taking research that produces real innovation. Indeed, it’s becoming less important for companies to have scientific expertise and more important for them to have “market awareness,” Glen Giovannetti of Ernst & Young’s global biotech unit told Bloomberg.
Investors’ reluctance to fund early-stage biologics firms has hurt the latter’s research and development (R&D) budgets. Companies without products on the market had to decrease research spending by 1% in 2010, according to Ernst & Young. Small biopharmaceutical companies are thus cutting their research budgets just as many traditional pharmaceutical firms are doing. It seems to me that this continuing trend could become a vicious cycle in which small biologics companies keep spending less on research, which in turn prevents them from discovering potentially marketable products that could keep them afloat.
Biopharmaceutical companies do seem to be more innovative than traditional pharmaceutical companies. But it looks like the large-molecule playing field could shrink over time as big companies get bigger and small companies fail. This shift would mirror the evolution of the small-molecule industry. Likewise, market pressures are already making it harder for early-stage large-molecule firms to get R&D funding—and encouraging a conservative approach to research. If the biopharmaceutical innovation engine eventually runs out of gas, what will the drug industry do?